The Effects of Brexit on the British Macroeconomy

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Из курса от партнера IE Business School

Business Opportunities and Risks in a Globalized Economy

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IE Business School

Business Opportunities and Risks in a Globalized Economy

оценки

Курс 3 из 3 — Specialization Globalization, Economic Growth and Stability

This is the last of the three courses part of the Globalization, Economic Growth and Stability Specialization.¨Business Opportunities and Risks in a Globalized World¨ is the the 3rd and final course of the ¨Globalization, Economic Growth and Stability¨ Specialization taught by IE Business School's Professor Gayle Allard. This course is designed to help an investor, businessperson or economist approach macroeconomic, institutional and international data and derive information from the indicators that point to the types of opportunities and risks that they present. Students will gain practice by handling the data of some of the largest economies in the world –the United States, Japan, the European Union, China and India—and “reading the story” of their economies from their data, yielding surprisingly profound conclusions about their present and future. The course is the third in a series for the specialization but it is also a stand-alone course for anyone who wants practice in practical macroeconomics. This course includes 4 modules, each one deep-diving into the macroeconomic circumstances that have been brought up in the recent history of four key regions: the USA, Japan, Europe, and China and India. Students will analyze the ways in which international economies relate with one another, the benefits of trade and migration and economic development and how it occurs, among other themes. Professor Allard takes overarching macroeconomic theory and turns it into a practical tool for those interested in the opportunities and risks of investment and doing business in each of the four regions covered.

Из урока

The European Integration Experiment: The Benefits of Trade and Migration

The EU is the world´s largest trading area and if it were a country, it would be one of the world´s largest. European nations opted for an intense project of economic integration in the postwar period which has incorporated 28 nations, but one of them, the UK, is in the process of leaving. We will discuss in this section how this type of integration conditions growth, crisis and recovery, and the mechanisms that countries with a single monetary policy and a single currency have (and do not have) to adjust their economies. What did we learn from the Eurozone crisis and the vote by so many UK citizens to leave Europe, and what are the implications for businesses operating in this region?

The UK's Conflicted Relationship with the EU and Brexit4:53

How Will the UK Leave the EU?2:44

The Effects of Brexit on UK Industries7:38

The Effects of Brexit on the British Macroeconomy7:41

Why Did Brexit Occur? Another Impossible Trinity6:06

Познакомьтесь с преподавателями

Gayle Allard
Professor
Economics

We've seen losses in individual industries.

How could we calculate losses for the entire economy?

Well, again this depends on what kind of an agreement the UK reaches with the EU.

Whether they have a very intense integration agreement

like maybe Norway does or Switzerland with the EU,

which requires them to pay into the budget,

obey the rules, have no impact on the rules,

but have a large amount of trade with the European Union.

They would also have to permit some free movement of people.

So, if they had that arrangement,

this would be sort of an optimistic scenario,

the losses should be less.

If they go drastic,

where they go to just maybe a free trade arrangement like Canada has with the EU,

where only goods are involved.

There's no movement of people.

There's no paying into the EU budget,

no obeying EU rules,

then the losses would be much greater.

So, it depends how these negotiations play themselves

out and where Britain ends up as a result.

But initially, they were doomsday predictions that Brexit would

have a tremendously negative impact on the UK economy and has not yet.

The UK has not gone into recession.

We do have to remember though that it is still in the EU.

The pound has fallen and therefore,

the UK is exporting more than it ever has to the EU.

So, they're actually in a really nice situation right now as

the negotiations proceed and we wait for the final outcome.

But it is unlikely that they're going to be able to have

as much trade as a percent of their GDP as they had before,

just because the bears will be greater,

because the idea initially that they would make up for EU trade

by agreements with former colonies is not very practical,

because distance matters and many former British colonies are a long ways away.

We have to remember that the loss of the City of London would be a great blow to the UK

and it's still not clear what's going to happen to the City of London.

But there are lots of

other intangibles like if the freedom of movement of labor is restricted,

if the City of London disappears as a financial center becomes much smaller.

High skilled immigration to the UK will be reduced

either because they closed the door or because the jobs available are less attractive,

or the income is lower with a weaker pound.

So, all of these things deprive the UK of sources of growth, of income,

of value added, that will be felt over time,

little by little, maybe marginally year by year.

The result is going to be a smaller Britain.

Let's have a look at some of the estimates that different groups

have given us on what will happen to exports,

to GDP, to incomes as a consequence of Brexit.

The first slide shows what is expected to happen to British exports.

Now, remember that exports are part of the GDP equation.

So, less exports means less GDP and less income.

So, some forecasts are for a considerable decline in export growth.

If we look at this by sector,

we mentioned the automotive sector and you can see it on this graph.

It's not the one that would suffer the most.

There's also machinery and equipment,

there's the chemical sector which is huge,

and there's energy and a number of other sectors that we'd see

their export growth suffer more or less under different scenarios.

Where would the UK lose more exports,

to what regions, or to what countries?

Well, Germany is the one that takes most UK exports now followed by the Netherlands.

So, both of those would be effected strongly

under Brexit and exports to other EU countries as well.

So, if we add all of this up,

what happens to the GDP of the UK,

which is our underlying measurement of prosperity,

of well-being if you will.

This graph shows three different years into the future and showing how much real GDP,

GDP minus inflation, would be reduced in the UK as a result of Brexit.

Of course, again, it depends on what scenario you are assuming,

are they going to have a really close trade agreement with the EU?

Will the EU allow that?

Will the British accept that?

Or are they going to have a distant relationship like we mentioned,

maybe a free trade area like Canada.

Well, depending on those scenarios,

GDP would shrink more or less, right?

Of course, that then affects household income.

So, here you see three different scenarios,

assuming different outcomes of the talks and you see the reduction

in household income in the UK as a result of leaving the EU.

It's very substantial in the most pessimistic scenario.

But even the optimistic scenario,

households will have less income.

The UK government has estimates of how much it

expects GDP and household incomes and wages to be affected by Brexit.

We have to remember again that if the pound weakens,

inflation is likely to rise in the UK.

So, these estimates include

higher inflation and the lower growth that we've been talking about.

So, as you look at the different scenarios and

the different sources and the different metrics,

you can see that the losses will be substantial on the left hand part of this slide.

On the right hand part of the slide,

we see something that's quite ironic.

There was a lot of fake news in

the Brexit campaign as we've seen in other countries and other campaigns recently.

One of the claims of the Brexiters was that the country would save

more than £300 million a week by leaving the EU

because the UK does pay more into the EU budget than it receives,

as we've mentioned, and it pays into different EU programs.

Well, the irony of all of it is,

since the UK has passed from one of the fastest growing to one of

the slowest countries in the EU since inflation has accelerated,

and since growth in jobs is also decelerating,

the UK is actually losing an estimated

£340 million a week because of the uncertainty created by Brexit,

and this is before the whole impact has even been felt.

So, the losses to the UK are substantial,

and we could predict these if we know the theory of free trade,

we know the depth of integration in the EU,

we could predict that the UK would lose by leaving.

At the same time,

existing EU countries will also lose,

because they also lose the efficiency that's gained by trade with the UK.

This map shows you different EU countries and how much they will

lose because of the exit of Britain from the EU,

and you can see Germany is the most affected after Ireland because of course,

their trade is most intense with the UK.

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